Google Joins Apple Avoiding Taxes With Stateless Income

Google Inc. has used a pair of tax shelters known by tax attorneys as the “Double Irish” and “Dutch Sandwich” that move foreign profits through Ireland and the Netherlands to Bermuda to avoid about $2 billion in income taxes a year, according to the company’s filings in the U.S. Photographer: David Paul Morris/Bloomberg

May 22 (Bloomberg) -- U.S. Senate scrutiny of Apple Inc.’s
tax strategies turned the spotlight on a unit with $30 billion
in profit since 2009 that’s incorporated in Ireland, controlled
by a board in California, and doesn’t pay taxes in either place.

Apple officials acknowledged yesterday at a congressional
hearing that the entity -- a key subsidiary in Apple’s offshore
tax strategy -- is managed and controlled in the U.S., yet it
still isn’t paying U.S. federal income taxes.

The shifting of profits by multinational companies is
costing the U.S. and Europe at least $100 billion per year in
lost tax revenue, according to Kimberly Clausing, an economics
professor at Reed University in Portland, Oregon.

“Over the decades, Congress and governments around the
world have allowed a system to develop which allows
multinational companies to earn income tax-free by using
contracts to shift the income, on paper, to companies in low-and
zero-tax countries,” said Michael Durst, a retired
international tax attorney based in Washington. The result “is
eroding public confidence in the fairness of tax systems in the
United States and around the world.”

Similar practices by an assortment of companies -- from
Google Inc., owner of the world’s most popular Internet search
engine, to Forest Laboratories Inc., the maker of antidepressant
drug Lexapro -- are drawing increased scrutiny from regulators
in the U.S. and around the world, particularly as European
nations face a backlash against austerity measures.

Tax Avoidance

Corporate tax avoidance is now being targeted on several
fronts. The Organization for Economic Cooperation and
Development, a think tank funded by governments around the
world, is scheduled to release an “action plan” in July to
deal with tax revenue lost to profit shifting. The plan came in
response to a request by the Group of 20 nations.

The European Commission also is targeting key rules that
enable corporate profit shifting.

In the U.S., President Barack Obama’s Treasury Department
in April released a list of global tax loopholes to close, many
of which it has targeted unsuccessfully in the past.

Meanwhile, the U.S. Senate Permanent Subcommittee on
Investigations found that Apple avoided paying income taxes on
$74 billion of profit during the past four years in part by
moving patent rights to a web of offshore subsidiaries that pay
virtually no income taxes.

Apple Chief Executive Officer Tim Cook yesterday maintained
the company had done nothing wrong and said it pays “all the
taxes we owe -- every single dollar.” The Cupertino,
California-based company is also not alone in moving profits to
such offshore units.

‘Double Irish’

Google, for example, has used a pair of tax shelters known
by tax attorneys as the “Double Irish” and “Dutch Sandwich”
that move foreign profits through Ireland and the Netherlands to
Bermuda to avoid about $2 billion in income taxes a year,
according to the company’s filings in the U.S.

Like Apple, Mountain View, California-based Google shifts
profits into an Irish subsidiary that doesn’t pay taxes in
Ireland. In Google’s case, it says the unit is managed in
Bermuda, which has no corporate income tax.

Google has been questioned by the U.K. Parliament twice
since November over its tax affairs and is in a more than $1
billion dispute with French tax authorities.

Yahoo! Inc. has funneled hundreds of millions of dollars in
profits through a Dutch bookkeeper’s suburban home office en
route to subsidiaries in Mauritius and Switzerland. Like Apple,
Sunnyvale, California-based Yahoo has deposited profits in an
Irish subsidiary that claims not to be a tax resident in
Ireland, but instead in the Cayman Islands, filings show.

Forest Labs, Cisco

Forest Laboratories, based in New York, has used a
virtually identical strategy to that of Google, claiming most of
its profits are offshore, even as its sales are almost entirely
in the U.S. It has also used an Irish unit that claims to be
headquartered in Bermuda, and therefore not on the hook for
Irish income taxes.

Cisco Systems Inc., based in San Jose, California, has
avoided paying billions of dollars in income taxes by
attributing about half its worldwide profits in recent years to
a tiny unit at the foot of the Swiss Alps.

The Irish Finance Ministry yesterday said there’s “no
possibility” of special tax rate deals for companies, in an e-mailed response to questions on Apple’s tax treatment of profits
of Irish affiliates.

‘Check-the-Box’

The companies have also depended on a U.S. tax regulation
known as “check the box” -- cited by the Senate investigators
in the Apple case -- that makes offshore transactions
effectively invisible to the IRS.

Senate investigators drilled down into a crucial component
of Apple’s strategy that Edward Kleinbard, a former corporate
tax attorney and professor at the University of Southern
California Law School, said may make the company vulnerable to
taxation in the U.S. In the panel’s report, the top Irish
subsidiary receiving offshore profits was found to have held
almost all its board meetings in California, with its sole Irish
board member rarely attending.

“Apple says their Irish subsidiaries’ ‘mind and
management’ lies outside Ireland, but the real question is, do
those subsidiaries have any mind of their own at all?”
Kleinbard said. “If they are not really competent to make
independent decisions to take on risks and make contracts on
their own behalf, then the structure collapses of its own
weight, and the income properly should be taxed to the United
States.”